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Shares of Shake Shack (SHAK) are cooking today, trading at their highest levels since November 2021 after the better burger chain edged past Q4 EPS and revenue expectations. However, what's really setting a fire under the stock is the company's improving operating margins and its expectation for further margin and earnings expansion in 2024 and beyond. CEO Randy Garutti, who announced his intention to retire once a successor is found, stated that one of SHAK's strategic priorities this year is to make the company even more profitable.

• Despite operating in a very challenging climate that's rife with inflationary pressures and plenty of competition that's vying for fewer consumer dollars, SHAK expanded its Shack-level operating profit margin by 80 bps yr/yr to 19.8% -- exceeding its guidance of "approximately 19.0%."
• Better yet, the company said that it's now aiming for Shack-level operating profit margin of 20-21%, which is a level it hasn't seen in at least a few years.
• SHAK's recipe for stronger margins includes a few different ingredients. One such ingredient is improving throughput in order to increase sales and improve service. Mr. Garutti said that SHAK is targeting a 30-second improvement in throughput, which will be supported by an increasing deployment of kiosks. So far, early results from these kiosks are promising as SHAK is seeing increased trade-up to premium menu items, driving average check higher.
• Additionally, the company is implementing new labor modules to further optimize throughput and based on the success of its initial test of the modules in Q4, it's planning to roll out the initiative to more restaurants in early 2024.
• Although inflationary pressures have eased somewhat, food and paper costs were still up mid-single-digits in Q4, while beef prices were up mid-teens and fry costs were up by high-single-digits. To help ease these cost pressures, SHAK has identified opportunities in its supply chain, including through the addition of new suppliers and an ability to optimize freight costs.
• Beyond these margin-expanding initiatives, SHAK also believes that it can reduce development and pre-opening costs this year. Mr. Garutti characterized 2023 as a "high water mark" for these costs, adding that the company is targeting a decrease of at least 10% for annual pre-opening expense per Shack from 2023 levels. After opening 85 restaurants in 2023 -- an annual record for the company -- SHAK's development plans will remain ambitious in 2024, aiming for approximately 40 domestic company-operated openings this year.

The main takeaway is that SHAK is executing well and is entering Q1 on a high note -- the company noted that sales trends have improved in February. Most importantly, SHAK is poised and is expecting to deliver stronger earnings growth in 2024.